Mergers and Acquisitions may potentially affect the market structure and the level of competition in the market. Accordingly, competition authorities interfere in cases that raise such concerns. Merger transactions are notified to competition agencies based on the prescribed jurisdictional numerical threshold and on factors that enable the acquirer to exercise control or exert some degree of influence over the previously independent enterprise. In this context, not only minority investment leading to acquiring of control or change in control is considered to be a concern but, in many merger regimes, even acquisition of ‘noncontrolling’ minority stake is also considered to raise adverse competition concern. However, acquisitions made only for the purposes of investment or in the ordinary course of business are generally not required to be notified as they are, by their very nature, unlikely to adversely affect the market structure or substantially lessen competition in the market.
Under the provisions of the Indian Competition Law (Item I of Schedule I of the Combination Regulations), acquisition of less than 25 per cent of the shares or voting rights, made ‘solely as an investment’ or in the ‘ordinary course of business’, are exempt from notification, provided no other controlling rights are required. In the US, Hart Scott Rodino (HSR) Rules formulated under the Hart Scott Rodino Act, 1976 exempt acquisitions of up to 10 per cent of voting securities if made solely for purpose of investment (Rule 802.9) and up to 15 per cent of noncontrolling shareholding (applicable in case of institutional investors) if made in ordinary course of business and solely for the purpose of investment (Rule 802.64).
In the Indian context, the stakeholders have at times misconstrued the exemption provided under Item I of Schedule I resulting in transactions involving acquisitions of less than 25 per cent of shares or voting rights not being notified to the CCI. While imposing penalties for such lapses, the CCI observed in such cases that the real intent of the investor was not ‘solely for the purpose of investment’ or in the ‘ordinary course of business’ but to exercise some degree of control or influence or enter into a strategic alliance with the seller. It has thus also looked into the intent of the parties. In light of the above, the stakeholders have to be extremely cautious in interpreting the scope and reach of the aforesaid exemptions.
While some guidance can be taken from the decisional practices of the CCI which may be premised on facts specific to that case, interpreting the words “solely as an investment” may likely continue to pose challenge to the stakeholders. Before we examine few such cases as decided by the CCI, it may be helpful to see the practice as followed in US as the CCI’s interpretation seems to be highly akin to similar reasoning. In the US, under the HSR provisions, voting securities are considered to be acquired ‘solely for the purpose of investment’ only if the investor has ‘no intention of participating in the formulation, determination or direction of the basic business decisions of the issuer.’ The Statement of Basis and Purpose published by the Federal Trade Commission (FTC) during promulgation of the HSR Rules explains that certain conducts are inconsistent with the claim of solely for investment purpose, such as nominating a candidate for the board of directors, holding a board seat or being an officer, proposing corporate action that requires shareholding approval, soliciting proxies, or being a competitor of the issuer. The exemption does not apply if the acquirer holds stock over ten percent of the issuer’s voting securities, regardless of any intention to participate in management. The FTC also takes a position that stock is no longer held ‘solely for the purpose of investment’ after an investor decides to participate in or influence management of the issuer, thus making active non-passive conduct inconsistent with investment-only exemption.
Illustratively, in one of the cases in the US, in mid-2015, on recommendations of the FTC, the U.S. Department of Justice (DoJ), filed complaint and proposed settlement in Federal Court for the District of Columbia to settle charges that three affiliated hedge funds managed by Third Point LLC violated the HSR Act by failing to make mandatory pre-merger notification filing and observe the waiting requirement in connection with their 2011 acquisitions of stock in Yahoo! Inc. The complaint alleged that Third Point improperly relied on the investment-only exemption, since at the time of stock purchases of Yahoo shares by the funds, the defendant which made investment decisions on behalf of the funds was engaged in conduct that was inconsistent with the claim of investment only as it contacted certain individuals to gauge their interest and willingness to become the CEO or a potential board candidate of Yahoo; drafted correspondence to Yahoo announcing that Third Point was prepared to join the Yahoo Board; internally discussed the possible launch of a proxy battle for directors of Yahoo and stated publicly that it was prepared to propose a slate of directors at Yahoo’s next annual meeting. The FTC, however, decided not to levy any civil penalties and sought only injunctive relief since the violation was short-lived and inadvertent as Third Point had soon filed the notification Forms and observed the required waiting periods for subsequent purchases of Yahoo shares. In another case, United States v. Pennzoil Company (1994), wherein Pennzoil acquired shares in its competitor but did not file pre-merger notification, it was enough to take the acquirer out from the purview of exemption of ‘solely for the purpose of investment’ on the ground that its board members were anticipating membership on the competitor’s board and consequent future participation in formulation of the latter’s business decisions. The company was levied civil penalties of $2.5million pursuant to a settlement agreement.
Under the Indian M&A regime, not only is the acquisition of less than 25 per cent of shares or voting rights exempt from notification, Item 1 of Schedule I also treats acquisitions of less than 10 per cent of the total shares or voting rights of an enterprise as ‘solely as an investment’ provided the acquirer has the ability to exercise only such rights that are exercisable by the ordinary shareholders of that enterprise and the acquirer is not a member of the board of directors of that enterprise, does not have a right or intention to nominate a director on the board of that enterprise and does not intend to participate in the affairs or management of that enterprise. In case (C-2014/08/202), the combination contemplated transfer of Abbott Laboratories (Abbot)’s branded generics and specialty pharmaceuticals products business in Europe, Japan, Australia, New Zealand and Canada to New Moon B.V. (Acquirer), which was to thereafter hold all of Mylan Inc.’s (ultimate holding company of the Acquirer) existing business and the business proposed to be acquired from Abbott. In consideration thereof, Abbott was to acquire approximately 21 per cent shareholding of the Acquirer. The CCI observed that an acquisition of shares or voting rights, even if less than 25 per cent, may raise competition concerns if the acquirer and the target are either engaged in business of substitutable products/services or are engaged in activities at different stages or levels of the production chain and such acquisitions need not necessarily be termed as ‘solely as investment’ or ‘in the ordinary course of business’. Similarly, in combination case (C- 2015/08/301), the acquisition by Alibaba.com Singapore E-Commerce Private Limited of 4.14 per cent of noncontrolling minority stake in Jasper Infotech Private Limited was not exempted since the acquirer and the target were both competitors.
In combination case (C-2015/05/276), as the Investors’ acquisition of 11 per cent of equity share capital of Mankind Pharma Limited entitled them to appoint one director on the board of directors of the target and also conferred certain affirmative rights including commencement of a new business, the CCI noted that such rights do not make the acquisition as ‘solely as an investment.’ The CCI further opined that an acquisition could be considered as solely for the purpose of investment if the acquirer had no intention to directly or indirectly participate in the formulation and determination of the business decisions of the target.
The CCI has also not made ‘solely for investment’ exemption applicable in cases where the parties enter into a strategic alliance. In combination case (C- 2014/12/235), an acquisition of 2.77 per cent of the paid up share capital of Reliance Capital Limited by Sumitomo Mitsui Trust Bank Limited, even though not leading to any change in control, was not exempted being in the nature of a strategic alliance between the parties for establishment of a bank. In combination case (C-2012/11/95), acquisition of 3.32 per cent of total paid up capital of Pipavav Defence and Offshore Engineering Company Limited (Pipavav), being in nature of a strategic technological partnership wherein the acquirer was granted certain affirmative rights including the right to nominate one director on the board, was not considered as solely for the purpose of investment. In combination case (C-2014/08/199), acquisition of 10 per cent equity shares of Sunflag Iron and Steel Company Limited by Daido Steel Co. Ltd. was also not considered by the CCI to qualify for the solely for investment exemption as the parties had entered into certain agreements for technical assistance and use of the investor’s technology. In combination case (C-2014/05/175), pertaining to the transaction involving acquisition by Deepak Fertilizers and Petrochemicals Corporation Limited (DFPCL) and SCM Soilfert Limited (wholly owned subsidiary of DFPCL) of 24.46 per cent equity share capital of Mangalore Fertilizers and Chemicals Limited, the CCI held that the phrase ‘solely as an investment’ indicated ‘passive investment’ as against a ‘strategic investment’ and hence to qualify for the exemption, an acquisition must not have been made with an intention of participating in the formulation, determination or direction of the basic business decisions of the target which could be done through various means including voting rights, agreements, representation on the board of the target or its affiliate companies, affirmative/veto rights in the target, etc.
During the last five years of merger enforcement in India, it emanates from the various decisions of the CCI and imposition of penalty in cases where the parties had either delayed or had not filed the notification that the ‘solely as an investment’ exemption, has been interpreted restrictively by the CCI. Accordingly, extreme care has to be observed by the parties while seeking to invoke the exemption of ‘solely as an investment’ in case acquiring less than 25 per cent of shares or voting rights, otherwise exempt from notification.
As James Mullenix, then associate director of the FTC’s Bureau of Competition said during a speech in 1988 that ‘If any company is seriously considering a takeover attempt, but has not yet made a final decision, it is not buying stock solely for the purpose of investment. If it expects to nominate someone for a seat on the board of directors, it is not buying stock solely for the purpose of investment.’
Thus, the term ‘solely as an investment’, as used in the Indian merger regulations, shall apply to buyers who intend to hold securities only as passive investors. If an acquirer purchases securities with the intention of influencing basic business decisions of the target or participating in its management, the exemption would not be available. Individuals who are managing members (e.g., CEO or board members) of a company, as well as the company itself, ought to be aware of the requirements of the Competition Act, 2002 and take pre-emptive legal advice and steps to determine the applicability of the exemptions to their transactions
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